FCC Outlines Rules For Wireless Early Termination Fees

Martin also outlined a set of five rules that would help control early termination fees and protect consumers.

It was revealed last month that the FCC was mulling a proposal to give cell phone users a break on the fees carriers charge when users end service before their contract was up. Opponents of the proposal, however, feared that such a mandate would free wireless carriers from being sued in state court by consumers upset about excessive charges.

The proposal, which was reportedly submitted to the FCC by wireless industry giants including Basking Ridge, N.J.-based Verizon Wireless, would give cell phone users the opportunity to cancel service without any financial penalty for up to 30 days after they sign a contract or until 10 days after the first bill arrives. The proposal would also force wireless companies to reduce fees month by month over the course of a contract based on how long the customers have left before that contract expires. Early termination fees would still be in place, just at a reduced cost, and the proposal would not be retroactive, meaning it wouldn't protect users who have already paid for cancelling service during a contract period.

At a hearing in Washington this week to determine whether the FCC should regulate early termination charges, Martin detailed the expense of early termination fees and noted that consumers are concerned.

"When a consumer ends a contract with [a] wireless carrier, he is typically charged a fee ranging from $150 to $225," Martin wrote in prepared testimony. "If you have multiple phones, you'll likely be charged multiple fees. That is a significant sum for a subscriber to pay who is dissatisfied with the quality of service. In practice, it can lock people into a service they really want to leave."

According to Martin, in 2006 and 2007 the FCC received more than 3,700 complaints about early termination fees. He said many consumers receive their first bill and are surprised by the amount, only to learn that the trial period has ended and cancellation could result in a $200 whack for early termination.

"It is essential that we examine ways to protect consumers and ensure that they understand the fees associated with the communications services," Martin wrote in a statement.

Martin admitted that early termination fees can act as a legitimate way for carriers to recoup costs, usually the cost of phones sold at a discount or service plans offered under a special promotion. But he added that he fears it could be abused.

"Our goal at the FCC must be to protect consumers," Martin wrote. "It is therefore essential that we examine how early termination fees are being used and discuss the best way to guarantee consumer protections."

Martin said that if the FCC takes responsibility for early termination fees, it must set rules that adequately protect consumers. Martin suggested a list of five potential rules for early termination fees:

- The early termination fee should be reasonably related to the cost of the equipment the consumer receives. For example, a $500 phone should not have the same early termination fee as a $50 phone.

- The early termination fee should be pro-rated over the life of the contract.

- Any contract for service should be for a reasonable length of time.

- When a consumer renews his contract without receiving new equipment, the early termination fee should not be extended.

- Finally, consumers should be able to take the phone home and receive their first bill to make sure the service and bill are consistent with what they expected before an early termination fee kicks in.

"I believe this set of rules is important to protecting consumers," Martin said. "I believe it is important for the Commission to examine what are responsible practices as they relate to early termination fees. This issue is growing in importance as the practice of charging early termination fees spreads to other communications industries such as video and broadband."

Martin also acknowledged that while states play a strong role in protecting consumers, he is skeptical that class action lawsuits are the best method for consumer protection because not all consumers benefit from the lawsuits and each state will set their own varying regulations.

"The hallmark of a free market is the ability of consumers to choose from a variety of services and service providers," Martin wrote. "I am concerned that early termination fees are being used not as a means of recovering legitimate costs but as a means of locking consumers into a service provider. Early termination fees shouldn't function as a hindrance to consumers' ability to choose, or switch to, the service or provider they want."

Major wireless carriers are already making attempts to ease consumer tension. Starting last month, AT&T began prorating early termination fees for customers with one- or two-year contracts. AT&T is also taking $5 off of the termination fee for each month that the contract was active before it was severed. Verizon Wireless also put a prorated early termination fee plan in place, where the fees can be reduced to $60. Sprint too has been kicking around a termination fee prorating plan, but it has not yet been put into action.

Despite the plans, however, Verizon, AT&T and Sprint have stood by fees saying they're a necessary tool to recover subsidies they provide for handsets that consumers get or popular service plans and other up-front costs and discounts.

At the hearing this week, Verizon executive vice president Tom Tauke testified in defense of the fees. Without early termination fees, he said Verizon could not subsidize handsets and devices to new customers, Reuters reported. Tauke added that without those subsidies, many customers couldn't afford the handsets.